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Maximizing Equity Market Sector Predictability in a Bayesian Time Varying Parameter Model* - page 46 / 46

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Figure 4

Expected and Actual Geometric Returns The solid line in the figure below indicates the expected average annualized geometric return over the 1995-2002 period based on a Monte Carlo Simulation. The simulation is designed so that we assume only long-positions for a specified number of months that are selected randomly. The actual returns based on the different econometric specifications used are signified by uniquely colored triangles on the same figure.

Kalman

19

16

Rolling OLS (5 yr window)

Rolling OLS (1 yr window)

13

95th percentile

Expanding OLS

Discrete Rolling OLS

5th percentile

10

7

4

1

-2

-5

-8

-11

Average Annualized Geometric Return

-14

-17

-20

160

140

120

60 80 100 Number of Weeks in Long Only Position

40

20

0

45

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